jesse’s Teranet Trendline Analysis

“…assuming one purchases a $500,000 property at today’s prices (170 Teranet index), looking at scenarios in 2015 and 2020 where prices re-align with the respective trend lines:

“New Normal” price will appreciate to $670,000 (10.6% CAGR) in 2015 and $1,030,000 (9.5%) in 2020
“Trendline” price will appreciate to $508,000 (0.9%) in 2015 and $655,000 (3.6%) in 2020
“Old Normal” price will depreciate to $341,000 (-11.7%) in 2015 and $394,000 (-2.8%) in 2020
“Old Normal Bottom” price will depreciate to $302,000 (-15.0%) in 2015 and $350,000 (-4.2%) in 2020

– from ‘Vancouver Teranet HPI Trendline Analysis’, by jesse, at Housing Analysis, 30 Mar 2012, see his article for definitions of various trend lines.

jesse’s analysis assumes return to various arguably-valid trend lines.
In each case there is the possibility of overshoot, a common scenario when ‘reverting to the mean’.
This analysis can be compared with our own technical analysis, previously posted [VREAA 11 Sep 2010, updates 12 Oct 2011 and 2 Jan 2012; see below]. Note, of course, that our analysis is of Vancouver average SFH prices, not the Teranet data which jesse’s analysis uses, and is limited by the use of straight lines on linear scale charts.
We foresee an ultimate reversion to a trendline reflecting growth at the rate of inflation (roughly equivalent to jesse’s ‘Old Normal’) but, given the magnitude of the diversion from mean on the way up, we fully expect a large overshoot to the downside on the way down. The speculative component will likely be completely wrung out of the market, and this will probably require a return to early 2000’s prices. That equates to the 75 range on the Teranet chart, and the 444K+ range on the Vancouver SFH chart. Thus, 50%-66%-off the peak prices.
– vreaa

41 responses to “jesse’s Teranet Trendline Analysis

  1. Technical analysis is akin to reading tea leaves.

  2. There’s not much for $500K in this city besides condos, and most of them ridiculously small. $320K would be affordable to the median census family – but I think because of that it’d have to be a family size condo ~ 1000 sq ft? Looking at housing mix and prices, I’d predict we’re radically overbuilt for barista-condos; tiny studios and one bedrooms. 20 something singles also tend to follow trends. ( Certainly my group weren’t buying property when I was 20 something. It would have been a laughable thought. Mortgages were for old people with no hope left. ie: parents. )

    I wonder how the market’s going to *work*, though. $450k makes sense given fundamentals for SFH, for those who’re moving up on the property ladder – but I imagine that ladder will be put out of commission for awhile given a crash. That could play out interestingly in the SFH market, especially if momentum investors are leery and so there’s not a lot of outside-Vancouver vultures swooping in.

  3. “…lenders such as Bank of Nova Scotia warn that tougher rules could threaten the economic recovery”….WTH? Reminds me of the “peace at any price” spiel… 😀

    • As if easy credit were not risk enough to damage our economic recovery for the next decade. What do those guys really think it means when most of the country is swimming in debt. No consumption of course. And in an economy that is 65% consumption oriented it means we are already in store for a hangover that seems endless. While I favour a gentle approach right now that does not disturb the balance too much I simply cannot agree with the banks that a new regulatory framework is a bad thing. We need to begin somewhere if only to prevent this situation from happening again. If the banks cannot show some restraint in expanding their business when it is clearly detrimental to the overall economy then they should anticipate a firmer approach from regulatory agencies.

  4. Basement Suite

    Look at 2008 there in glorious color. What a paltry little “correction” that was, with everyone screaming about the sky falling in 2008? Dream on. So far: raging bull market, albeit one gone parabolic. What can stop it? It won’t be higher interest rates, sub 3% mortgage anyone?

  5. I dont think any of those trendline scenarios are likely. As credit conditions changed between 2000 and 2007, , I think the old trend line simply shifted up by300k or so. The ability for all buyers to buy expanded dramatically, but none of the factors influencing market growth changed in favor of increasing prices. ( boomers, immigration, etc). if those demographic factors are sufficient to weigh on the market, prices may come down but unless credit conditions change, the average price will be the max the average family can mortgage and then some to factor in existing equity.

    • “unless credit conditions change”

      A small key opens big doors. – Turkish proverb

      • Actually, Jesse… There is a much better Turkish proverb… Infinitely practical and morally sound… Especially, in those rare conflicted moments when a Gentleman is trying to decide how best to ‘proceed’… ‘Ahem’.

      • which scenario should a gentlemen proceed with?

      • When in doubt, Chubster… Just ask yourself… “What would Zorba do?”

        Alternatively, brace yourself with Ouzo… and dance [beach optional but recommended].

      • actually, i was considering whether to be old, normal, medicated, or cocainated

  6. Some commentators on this blog have mentioned they do not believe prices will fall until interest rates rise. I understand that there is a monthly payment affordability boost to low interest rates but surely in a rising market that is eventually trumped by the higher price that you need to pay? To my mind low interest rates can goose the market for a while but eventually their effect on monthly payments is cancelled out by the sheer size of the mortgage debt.

    • Yes, even at very low interest rates affordability limits are met, and many believe we are there, now.
      However we believe that a more important factor is that, in a rising price environment, buyers are prepared to push affordability to the max (because they foresee ongoing gains), but, in a falling price environment they will lose that desire. See how profoundly that could effect things?

      • That’s soooo true! Interest rates are now irrelevant. Vancouver prices have bubbled so high, that these prices are not even sustainable with these cheap rates. In 2008, the market proved that those prices were not sustainable. So prices slid, and the only way to save the market was a cut in rates. There’s no way the Feds could jump in and save the market this time. It would of been better off to let the correction take place back in 2008. Idiots!

      • you’re obviously talking about variable rates. Those on fixed (60%) aren’t worried about rates increasing – and the other 40% on variable are ready to lock in a fixed rate at the first sign of rate pressure.
        Really, it seems like the renters here are more afraid of mortgage rate changes than the actual owners.

    • Basement Suite

      True we can only climb so high, but then we arrived at the “new normal” level, and maybe plateau for awhile or just start trending with inflation, from here. I don’t see us going back to the “old normal” prices as long as rates are so stupid low, because the monthly payment on an old normal mortgage would be ludicrously low, one could buy 3 houses. That punishes savers who actually want to pay down a mortgage fast, and maybe make a big down payment. No incentive anymore, most of the exorbitant cost is now principal, you end up paying a fortune even if you buy it outright. I think we have found our new normal, and maybe now we’ll get another little 2008 dip, but I really doubt we crash from here with sub 3% mortgage rates today, which by the way are specifically designed to hold this thing up. Lets get back to 6% mortgages one day (minimum that I would consider “normal”) in the far distant future and maybe we get a proper adjustment back to old normal (some call it a “crash”).

      • We will say a little prayer that this is not the new normal, Basement. By the way, one obvious delimiter to further house price appreciation is wages. They are flat. The very substantial percentage of income now required to service mortgage and LOC debt in Vancouver is nearing a terminus. Some might say it has gone beyond sustainability already. The other thing to keep in mind here is that low rates are no guarantee of continued bubble growth. It is easy enough to check on the US data and we can see that their housing market imploded when mortgage rates were similarly low. In fact, dropping rates lower as the correction commenced did absolutely nothing to stem the decline. Might be that whole “mass in motion” thing we learned in physics that I think is also applicable here. Once the decline begins it will not end until mean reversion is attained. Check the charts for US housing price declines versus the FRED charts of rates to see what I mean
        Hopefully the link works.

      • Basement Suite

        ” It is easy enough to check on the US data and we can see that their housing market imploded when mortgage rates were similarly low.”

        Not so, see charts:

        Rates spiked in the US from 2005 through 2007, then their bubble popped. That was not a coincidence; people could not afford the adjusted monthly payments, listen to all the reasons people defaulted, they plain and simple could not make their payments, oops, 2 million dollars really was a lot of money, when the loan wasn’t free. Once the bubble popped the US was/is fortunate (despite their moaning today) that dropping rates don’t so easily blow air back into a deflated bubble. But sub 3% mortgage rates can and are holding our existing, fully inflated Canadian bubble up quite handily.

      • You are correct there Basement. I never addressed the ARM resets but that spike did precede the correction and some are convinced that was the real trigger for the housing bust. Maybe I am just a fatalist who thought the bust was going to happen with or without rate changes just based on the dynamics that were in play. Easy credit, NINJA loans, liar loans, cash back down payments etcetera and the wholesale risky packaging of MBS securities equivalent to junk. The alarm bells were already going off in early 05 and guys like Schiff were declaring Fannie and Freddie were headed for purgatory even then which turned out to pretty much be the truth by the time the smoke cleared. What I am getting at here is that a poor regulatory environment together with risky lending practices and lax control over the Financial sector were already setting off red flags before rates triggered the issue. Maybe we can agree on a bit of both.

      • Focusing on rates is a mistake; credit can be rationed in other ways beyond private market competition for capital.

      • also, the pool of willing buyers is not unlimited – regardless of whether credit available

      • Basement Suite

        “Maybe we can agree on a bit of both.”

        Believe me Farmer, I want this crash as much or more than anyone here, I’m one of the few here who do not claim to be dreading it, but rather embrace it. I do agree there are other factors such as many you have spoken about; I just think sub 3% mortgage rates are the “pounds” while the other factors people keep picking at are the “pennies”. I fear too much focus on detail while ignoring the sub 3% elephant in the room is not setting us up for a proper end to this bubble, hence my belief we are headed for 2008 redux, complete with bounce. All the fancy economics seems to blind people to the obvious, which is the interest rate of the loan. That is the elephant. But here’s hoping I’m wrong.

      • “the monthly payment on an old normal mortgage would be ludicrously low, one could buy 3 houses.”

        But why do that if it’s a depreciating asset (or barely beats inflation)? The more you buy, the more you lose. Just like you could afford the payments on 5 cars, but there is little point in doing so (unless it’s somehow necessary for your business, or your really really enjoy owning those cars and don’t mind spending the money)

      • Basement Suite

        Also Jesse, Chubster and MM, and others, just wanted to add I appreciate your points of view and that I am in the (or AM the) minority here in my focus on rates. Since rates are going nowhere, time will tell, and though I am convinced otherwise, I would truly love to be wrong on this.

  7. And remember that the prices will crash well past whatever the appropriate trend line is before reverting to trend.

    • An overshoot seems likely to me too Snats. Especially so as the Chinese and Australian bubbles are bursting in sync with what looks like the conclusion of our own. A commodity hit right now would derail our Canadian recovery in any case and after the news that the Fed is not yet seriously entertaining more QE we need to consider that the investment community will now put more weight in selling into the highs than buying the dips. The sharp decline in metals today would also suggest that some doubts persist about both the deceleration in China and the wait and see approach of the Federal Reserve. I am watching copper as it seems vulnerable after failing to break out above 4.00 bucks and looks set for further declines. Gold too is signalling deflationary expectations as growth falters and the dollar heads into a period of strength. Just my musings. The ammo is certainly there lying latent for an inflationary boost but if borrowers do not borrow, consumers do not buy and velocity does not improve then the commodity complex will keep falling. Needless to say, none of this is positive for further house price gains in this country and any correction on the markets that approaches the 10% many now predict would just be the nail in the coffin for the Canadian housing bubble.

  8. I love the graph. Short term trend – up. Long term trend – up.

    • Somewhere in the back of my mind I recall Robert Prechter suggesting this next corrective phase would be on the order of the South Sea Bubble burst which might imply nothing will be normal for a long time into the future after the crash. Elliot Waves offer a worst case scenario. Honestly….I hope he is wrong.

    • what happens next? parabolic ramp is a positive if confirming change of fundamentals, negative if not. the latter is the kind of setup to avoid like the plague, or if possibly bet against with caution.

  9. Told-you-so-in-2007

    “Short term trend – up. Long term trend – up.”

    You obviously bought pre-2001. You will agree you bought in a different universe than those presently buying, no?

  10. Actually even if interest rates goes to sub 1% on 5 year mortgages and stay there for 25 years, we can still get a huge drop in housing prices.
    1 – People will push their affordability to the max, cut all non-essentials (TV, dining out, vacation, clothing) and the essential (lower quality food, less food, etc) to devote as much money into mortgage and buy the biggest house they can. What’s the result of that? House prices go up a while until non-housing business feel squeeze from the reduced spending and starts cutting back on staff and wages. People start losing their jobs, reduce their spending, and cause a feedback loop. This loop would cause more and more people to fail to keep up with payments which causes increase in foreclosure and more houses on the market with no one to buy them. The increase payments all go to the banks which let’s face it, isn’t really a driver of real economic growth and new jobs. Will foreign buyers come in and buy? Maybe but do they have enough $$ to buy at the current elevated price??

    2 – For the average person making $45K-$50/year that got a wage increase inline with core inflation of 2%, that’s 2% is pretty much gone already with all the various taxes and increase in taxes. All the while his living cost are going up due to inflation. Thus even with the wage increase, s/he is actually behind compared to last year and thus means less money to spend on non-mortgage payments and the result is see point 1.

    So non-interest rate increase is needed to pop this bubble. Time will do it for us unless real take home after tax wages starts going up.

  11. Ralph Cramdown

    Truly, the chart cries out to be inflation adjusted, and plotted semi-log. The better to focus the eye on the last bust, which, for buyers at the top, lasted 19 years until they broke even again.

  12. @jesse
    Would be interesting to see those charts with a 12 month rolling standard deviation. It’s a good indicator based on how wide prices are appreciating or depreciating. Here’s an example for Toronto

  13. Reading these charts is pretty obvious in my opinion but what isn’t obvious is the fact that many Vancouverites will argue about GVRD affordability and why everybody wants to live there yet they don’t even realize that the average GVRD detached home price is over $1 million. I provided this price stat to one of the soccer dads at my daughter’s practice and he flat out told me I was wrong despite him bragging about his huge increase in property taxes this year. Idiots don’t even understand their own property market and can’t see a bubble even if it hits them between the eyes.

  14. In the spirit of “Whatever Works”… as regards ‘FortuneTelling’… the following brief introduction to common cognitive errors may well amuse/inform… (Note To Ed/Jesse: I really do like those ‘charty’ things – but I prefer to think of them as an excellent RearViewMirror vs. a ‘sure-fire’ forward scanning market sonar)…

    [AlterNet] – 10 Big Mistakes People Make in Thinking About the Future

    • Nice!

      Perhaps #5 is may favourite (today, anyway):
      5. Any useful idea about the future should sound ridiculous at first.

      (and, yes, the future will be different, but it will also be the same…)
      (in other words: doesn’t repeat, but does ‘rhyme’)

    • yes but after all due consideration, one must arrive here …
      do. or do not. there is no try. – yoda

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